Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Stock Exchange, Inc., Relating to the Expansion of the Exchange's Auto-Ex System Capacity to 20 Contracts

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34702; File No. SR-PSE-94-18]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Pacific Stock Exchange, Inc., Relating to the Expansion

of the Exchange's Auto-Ex System Capacity to 20 Contracts

September 22, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 20,

1994, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') filed

with the Securities and Exchange Commission (``SEC'' or ``Commission'')

the proposed rule change as described in Items I, II and III below,

which Items have been prepared by the self-regulatory organization. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The PSE proposes to amend PSE Rule 6.87, ``Automatic Execution

System,'' to allow the Options Floor Trading Committee (``OFTC'') to be

authorized to increase, on an issue-by-issue basis, the size of the

equity option orders that may be eligible to be executive through the

Exchange's Automatic Execution System (``Auto-Ex'') up to a maximum of

20 contracts.

The text of the proposed rule change is available at the Office of

the Secretary, PSE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization

included statements concerning the purpose of and basis for the

proposed rule change and discussed any comments it received on the

proposed rule change. The text of these statements may be examined at

the places specified in Item IV below. The self-regulatory organization

has prepared summaries, set forth in sections (A), (B), and (C) below,

of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

(a) Purpose

The purpose of the proposed rule change is to enhance the

Exchange's ability to compete for options order flow. Accordingly, the

Exchange is proposing to increase the maximum size of equity option

orders eligible for Auto-Ex and to provide the OFTC with the authority

to designate such changes on an issue-by-issue basis. Under the

proposal, the OFTC would be authorized to increase the size of orders

eligible for an execution on Auto-Ex to a size of up to 20 contracts

without prior approval from the Commission.\1\

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\1\The Commission recently approved an Exchange proposal to

allow the OFTC to increase the size of Auto-Ex-eligible orders in

one or more classes of multiply traded equity options to the extent

that other options exchanges permit such larger-size orders to be

entered into their own automated execution systems. The rule

provides that if the OFTC intends to increase the Auto-Ex size

eligibility pursuant to the rule, the Exchange will notify the

Commission pursuant to Section 19(b)(3)(A) under the Act. See

Securities Exchange Act Release No. 34131 (May 27, 1994), 59 FR

29316 (June 6, 1994).

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The Commission approved the Pacific Options Exchange Trading System

(``POETS'') and its Auto-Ex feature as a pilot program in January

1990.\2\ On July 30, 1993, the Commission approved the POETS pilot

program on a permanent basis.\3\ The Auto-Ex system permits eligible

market or marketable limit orders sent from member firms to be executed

automatically at the displayed bid or offering price. Participating

market makers are designated as the contra side to each Auto-Ex

order.\4\ Participating market makers are assigned by Auto-Ex on a

rotating basis, with the first market maker selected at random from the

list of signed-on market makers. Auto-Ex preserves public Limit Order

Book (``Book'') priority in all options. If Auto-Ex determines that the

Book price is at or better than the market quote, the Auto-Ex order is

executed against the Book. Automatic executions through Auto-Ex are

currently available for public customer orders of 10 contracts or less

in all series of options traded on the PSE's options floor.

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\2\See Securities Exchange Act Release No. 27633 (January 18,

1990), 55 FR 2466 (order approving File No. SR-PSE-89-26).

\3\See Securities Exchange Act Release No. 32703 (July 30,

1993), 58 FR 42117 (August 6, 1993) (``POETS Approval Order'').

Pursuant to the POETS Approval Order, the PSE was approved to

designate equity option orders of 10 contracts or less as eligible

for automatic execution through the Auto-Ex feature of POETS. With

regard to index options, the Commission previously approved a

request by the Exchange to permit customer orders of up to 20

contracts on the Wilshire Small Cap Index to be executed through

Auto-Ex. See Securities Exchange Act Release No. 31397 (November 3,

1992), 57 FR 53368, 53372 (November 9, 1992).

\4\The Commission recently approved an Exchange proposal setting

forth certain standards for market makers participating on Auto-Ex.

The standards include restrictions on the number of Auto-Ex trading

posts at which market makers may participate and mandatory log-on

requirements to assure that market makers do not withdraw from the

system during volatile market conditions. See Securities Exchange

Act Release No. 32908 (September 15, 1993), 58 FR 49076 (September

21, 1993), (``Market Maker Participation Order'').

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The proposal would permit the OFTC to change the order size

parameter for Auto-Ex to a maximum size of 20 contracts pursuant to an

OFTC determination made on an issue-by-issue basis.\5\ The PSE believes

that any implementation of the proposal by the OFTC will not impose any

significant additional burdens on the operation and capacity of the

POETS system in general or on the Auto-Ex system in particular. In that

regard, the Exchange has submitted a separate capacity statement to the

Commission setting forth the basis for this contention.\6\ The Exchange

also represents that the OFTC will determine that adequate market

making capacity exists prior to increasing Auto-Ex order size

eligibility. The OFTC will make such a determination notwithstanding

the fact that floor officials may require market makers who are members

of a trading crowd to which a particular option class is assigned to

log onto Auto-Ex in the event that there is inadequate participation in

that options class.

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\5\The Commission approved a similar provision in the POETS

Approval Order, supra note 3.

\6\See Letter from Michael D. Pierson, Senior Attorney, PSE, to

Richard L. Zack, Branch Chief, Options Regulation, Commission, dated

December 20, 1993 (File No. SR-PSE-93-26).

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(b) Statutory Basis

The PSE believes that the proposal is consistent with Section 6(b)

of the Act, in general, and with Section 6(b)(5), in particular, in

that it is designed to facilitate transactions in securities and to

promote just and equitable principles of trade.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The PSE does not believe that the proposed rule change will impose

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received from Members, Participants or Others

Written comments on the proposed rule change were neither solicited

nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reason for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(a) by order approve such proposed rule change, or

(b) institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying at the

Commission's Public Reference Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing will also be available for

inspection and copying at the principal offices of the above-mentioned

self-regulatory organization. All submissions should refer to the file

number in the caption above and should be submitted by October 20,

1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\17 CFR 200.30-3(a)(12) (1993).

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[FR Doc. 94-24040 Filed 9-28-94; 8:45 am]

BILLING CODE 8010-01-M